Explaining the FED's message from Jackson Hole

The economic symposium held at Jackson Hole last week rocked the markets with Powell's concise but firm speech: affirming the Fed's determination to curb inflation, even if it means trading off negative economic growth and pressure from the labor market. Viet Hustler had an article quoting Powell's 8-minute speech and its impact on the financial markets in the Market Analysis section right after:

Quoting Powell's speech

Impact on financial markets right after

However, behind Powell's concise speech are macroeconomic data and historical lessons that perhaps not everyone knows. This week's macroeconomic spotlight from Viet Hustler will focus on explaining Powell's arguments to readers from the perspective of economic history, macroeconomic data, and views from economists.

Fed's strong affirmation on the goal of curbing inflation

For the FED, the easing trend in inflation last month doesn't carry much significance because one month's data cannot accurately reflect the recession trend. And in reality, inflation remains high and certainly won't decrease immediately.

Powell's speech at the Jackson Hole event strongly affirmed the FED's determination to curb inflation, despite the consequences of recession, unemployment, and a frozen housing market.

Recapping the main points in Powell's speech at Jackson Hole:

[1] Higher for longer: the standout phrase in Powell's speech affirming that “continuing to raise the policy rate higher for longer” is necessary in the current inflation context. Keep at it until the job is done! (Keep rates high until inflation control yields results).

[2] Some pain now or far greater pain later (some damage now rather than much greater losses later): Powell emphasized that the price to bring down inflation is the trade-off of slower growth and adverse effects on the labor market.

[3] Lessons from history: Powell emphasized that historically, the cost to the labor market will be even worse later if the FED delays in curbing inflation. In particular, Powell mentioned the name Volcker twice, demonstrating determination to keep rates high to curb inflation. This will be explained clearly in the next section.

[4] Price stability (price stability) is the FED's top goal, emphasized many times by Powell.

[5] People and businesses must consider inflation when making economic decisions.

General comments on Powell's statements are summed up in just 2 words: “concise” and “realistic”. Far from the sugar-coated FED statements last year about the “transitory” (transient) phase into inflation or the prior excuse of a still good labor market for rate hikes. Powell did not shy away from the impacts of rate hikes on slower economic growth and deteriorating labor market. In fact, Powell affirmed this is the “necessary” price to pay to curb inflation.

What are the reasons behind the above messages?

Below, Viet Hustler will analyze the historical events and data behind Powell's assertions that QT and hawkish actions by the FED are necessary in the coming period..

The reasons behind Powell's concise speech